UK economic recovery at risk as deflation looms for British businesses

The latest results from the BDO Inflation Index shows cost expectations for businesses fell for the sixth consecutive month in October to 96.2, compared to 100.5 in October 2013.

As this is little over the 95.0 mark, professional services firm BDO anticipates an inflation rate of zero and the trend suggests the Inflation Index will turn negative in February 2015.

The findings come as inflation for consumers fell further, with just a 1.2 per cent increase on household good for the year leading up to September.

If deflation does set in, the UK’s economic recovery could be at risk from a threat of lessened investment, employment and consumer spending, BDO says.

That said, confidence is still high as the BDO Output Index finds that business growth expectations fell marginally from 103.3 in September to 103.2 in October to indicate long-term growth.

Meanwhile, the BDO Employment Index rose in October to 113.4, from 112.3 in September, demonstrating plans to increase hiring in response to weak wage increases and a demand domestically.

Peter Hemington, partner, BDO, said: “The global economy has slowed and as a result the UK could become caught up in the same deflationary conditions the Eurozone is currently experiencing.

“Policymakers need to realise that there are far more significant downside risks for growth than there were three months ago. Action is needed now. Interest rate rises certainly should be put on hold, housing market controls have now done their job and the government’s intentions to boost infrastructure spending are most welcome, if not enough.

“Recent announcements on creating a northern powerhouse to rival London indicate that the government is thinking along the right lines, but we could do with more of this sort of thing in the upcoming Autumn Statement.”

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